What is sweat equity?
In real estate, sweat equity is the amount of work a homeowner puts into his or her home in an effort to improve the value of the residence. Sweat equity typically involves improving the appearance of the home or improving amenities.
Whether painting the exterior of the house or cleaning up the yard, any work that a homeowner puts into improving a home is considered sweat equity. Some projects add more value to the home than others. Sometimes just cleaning up a house and removing clutter can increase its worth. Projects like adding new kitchen cabinets could actually end up costing a homeowner more than they improve the value of the house. A real estate appraiser can help determine whether a project can be profitable during a resell.
Sweat equity example
People who flip houses often rely on sweat equity to make a profit. For example, Joe and Mary find a $150,000 home for sale. The price is well below that of other similar houses in the neighborhood. The home is not in good condition but can be improved with a little hard work. They buy the house and begin by painting, replacing damaged flooring, landscaping the yard, replacing broken windows, and adding new appliances. After all of this hard work, the home is worth $175,000. Joe and Mary can now sell it and make $25,000 of pure profit, minus time and supplies used to make the improvements. Sweat equity is popular with people who want to buy or flip a home but do not have much cash to invest.
Habitat for Humanity relies heavily on sweat equity to build its homes. Each new homeowner must put in a certain number of hours of work before moving into the home. This may involve constructing their own home or the home of a neighbor, cleaning up building sites, assisting in administrative duties, and more.
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